One of today's most popular clichιs is that the growth in service
industries and the decline in manufacturing has somehow made America
weaker. No week goes by that I don't see at least one lament in the
financial press that America has become a "service economy."

Today I came across references to America's fall from grace in two
different investment newsletters:

I belong to an athletic club. . .filled with lots of lawyers,
bushels of stockbrokers, scads of real estate salesmen and tons of
insurance agents. Oh yes, there are also a few doctors and bankers,
but precious little else. I've been going to this club for 10 years
and I've yet to meet an engineer, a chemist or a geologist. Almost
everyone I know is a salesman of some sort or another. I have a
feeling that this is the way it is all across North America. The
continent has become a Mecca for hamburger flippers and insurance
agents  hardly a prescription
for economic revival.

And:

A nation does not get rich selling services to itself.

Repetition can make an idea seem believable, but it doesn't make it
logical. Economic and investment writers aren't any smarter or learned
than you are  and may well have
much less analytical talent. They repeat clichιs not because they know
them to be true, but because they lack the ability to decide for
themselves.

Seeing through Economic
Fallacies

How do you distinguish an economic bugaboo from a matter of serious
concern?

Technique #1 for recognizing
a fallacy is to ask "Why?". Why does a given condition
prevail and not the condition the writer apparently would prefer? (Why,
for example, has America become a service economy? Because we're lazy?
Because Ronald Reagan made us do it?) If you ask why, you often discover
that the supposed terrible disaster isn't really a disaster at all. In
fact, it may be precisely the opposite.

Does the economic condition arise because people chose to do what they're
doing? If yes, then the condition is nothing to worry about. People
are getting what they want, and no economic writer has proven himself wise
enough to be believed when he claims that people want the wrong things.

Economic conditions arising from the voluntary actions of individuals
can't devastate a nation, because economic limits will prevent the
condition from going too far if it's truly harmful. It doesn't matter
whether the condition is a trade deficit, a wave of corporate takeovers,
greater personal or corporate debt, or a trend away from manufacturing.

But if the government is responsible for the situation, it can go on
seemingly indefinitely  until it
causes harm that might take years to repair. That's because the government
can force people to continue doing something even after the consequences
are obvious. Because force is the motive power, any program is bound to be
artificial and a diversion from what people would prefer 
even if it's a plan for safer products, greater savings, a stimulus to
some ailing industry, or more medical school graduates.

Contrary to the sloganized versions of history, Rome didn't fall
because the people cherished bread and circuses. Or because they forgot
their values or lost their sense of direction. It died because the
government squandered the wealth the people had accumulated when they had
been relatively free and productive.

The 1980s' savings & loan scandal didn't occur because S&L
managers suddenly became greedy and dishonest 
or because the industry was "deregulated." If deregulation leads
to fraud, why aren't there scandals in the computer industry or the
supermarket business  which are far
more "deregulated" than S&Ls? The S&Ls turned bad only
because the market was disabled by the government 
which allowed managers to make all-or-nothing bets with taxpayer money.

If the much-maligned trade deficit arose because the American people
developed a taste for foreign products, they will eventually run out of
the international credit necessary to pay for them 
unless foreigners are buying a lot of American products as well.

Ask

fortheSolution

Technique #2 for seeing
through an economic clichι is to ask what alternative the writer has in
mind.

Would the writer who worries that all the members of his athletic club
produce services (just as he does, incidentally) feel more
comfortable if they were farmers, guild carpenters, or cigarette
manufacturers?

So what solution does he have in mind? Is he suggesting that the
government outlaw salesmen and stockbrokers  and force those people to
take jobs in automobile factories? And, if so, who's going to arrange the
sales of the autos produced, and who will take care of the people who want
to provide capital to the auto companies?

Does the writer who says that "a nation does not get rich selling
services to itself" believe that a nation gets rich selling itself
Chryslers, corn, or soap? Does he want the government to prohibit the
sales of services  and permit Americans to sell only hard goods to
other Americans?

A nation's standard of living rises when its people are free to produce
what's in demand, and to buy whatever they want from whomever they want 
anywhere in the world. If they can afford services that make their lives
more comfortable, why should they stop using them? If they can't afford them,
they won't buy them. And they can't borrow the money to buy them unless
someone's willing to lend it to them.

In communist Vietnam and Cambodia, people were supposed to become
better citizens by being forced to leave their homes and their jobs as
teachers, factory workers, shopkeepers, or students 
and spend a couple of years working knee-deep in water in rice paddies.
Would Americans be stronger and better people if the government forced us
to stop working in service industries and shipped us to Detroit to toil on
assembly lines?

By trying to determine what solution the writer has in mind, you often
come to the conclusion that the cure would be worse than the alleged disease.

The

EvolutionofEconomies

In truth, there is nothing uniquely virtuous about manufacturing.

Primitive societies (very primitive societies) subsisted by
hunting. Every day required a new hunt just to get enough to eat. There
was no way to preserve meat  and,
aside from wild fruits and vegetables, there was no agriculture to provide
any kind of food beyond the catch of the day.

Eventually, people learned how to grow food, and thus escaped the need
to hunt every day of the year. And over the millennia agricultural
production gradually became more sophisticated, so that more food was
produced with fewer human resources. This allowed society to devote more
of its resources to making things 
to manufacturing.

As civilization progressed, manufacturing became more advanced 
enabling people to build better homes, preserve food, perform chores with
less physical effort, and move things and people from place to place more
easily.

Eventually steam power arrived, leading to the industrial revolution
and mass production. More and more goods were produced with less and less
effort  eventually allowing
factories to operate with fewer workers and freeing the rest to provide
services.

Thanks to the industrial revolution, there are more restaurants,
cleaners, researchers, entertainers, teachers, scientists, writers,
gardeners, doctors, dentists, accountants, advisors, and others who help
to make our lives more comfortable and enjoyable.

The move to a service economy is simply a further step upward 
a sign that fewer resources are needed for hunting, agriculture, and
manufacturing. Services are luxuries 
the icing on the cake of civilization. They are evidence that a society is
very wealthy.

I haven't heard anyone regretting that America is no longer an
agricultural economy  as it was in
the 17th and 18th century, and as the South continued to be in the 19th
century. Fortunately, it requires only 2% or so of America's resources to
produce enough food to feed us all 
freeing the rest of the resources to produce other goods and services.

Only 20% of America's resources are devoted to manufacturing today 
leaving roughly three quarters of our productive capacity available for
getting products to consumers, improving communications, and delivering
services that were unknown half a century ago.

Competing

intheWorld

The service-phobes say, "Yes, that's all very well. But a nation
can't export services as easily as it can products. To compete in the
world, our base must be manufacturing. The Japanese are producing cars and
computers while we cultivate lawyers and hamburger-flippers."

And that brings us to Technique #3,
which is to ask, "So what?". Why must we be better than
the Japanese at what the Japanese want to do? Why shouldn't Americans do
what Americans want to do?

And why should America be "competitive"? To what end? Those
who fret about America's place in the world want to sacrifice Americans'
standard of living to a goal they never spell out. Who cares what America's
place is in the world?

What happens to "America" is far less important than what
happens to the people who live in America. It doesn't matter whether
America is competitive, only that Americans live well. And "living
well" is a subjective standard that each American must set
individually for himself.

"Japan" supposedly is very competitive. But the average
Japanese lives about half as well as the average American. He works much
longer days, resides in housing we would consider substandard, spends
hours getting to and from work, and has little time to relax and enjoy
himself. Is that what the competitiveness buffs want for us?

The Japanese government directs the use of resources to make
"Japan" an awe-inspiring export machine 
but leaves consumers with less to enjoy. Is that what America needs?

Military

Capability

But Burger King can't produce military equipment. So, supposedly, we
have to keep our manufacturing base alive 
artificially, if necessary  in case
a war should come.

There always will be manufacturing in the U.S., however. The fact that
manufacturing is a smaller share of our economy than a hundred years ago
doesn't necessarily mean that manufacturing is disappearing, only that it
is more productive than it used to be.

In addition, it's hard to see how America needs much manufacturing to
defend itself. Most items of military equipment (tanks, battleships, landing craft, and bombers)
are needed only for foreign wars fought in foreign countries  wars that
history has demonstrated America should stay out of. As to military
equipment to defend America, no foreign
power has threatened to invade America since the War of 1812, and no
foreign power threatens to do so today.

To defend itself, America needs only a shield against nuclear attack, a
small standing army to defend its borders, and a small standing navy to
defend the shores. You don't need General Motors for those things.

Progress

Economic fallacies gain currency often because so few people bother to
challenge them. And sometimes, it requires only a question or two to see
through the emptiness inside a seemingly sophisticated concept. Questions
like: Why? What is it you want? So what?

As far as our manufacturing base is concerned, the share of the nation's
productive capacity devoted to manufacturing, mining, construction,
transportation, and agriculture has been declining for over a century.
Meanwhile, the share devoted to trade, utilities, communications, finance,
insurance, real estate, and other services has been rising. And we're
better off for it.

The progress since World War II is shown in the
table below.

If hand-wringing journalists and politicians don't like what they see
there, I hope they'll put away their typewriters and campaign planks, and
find jobs in a factory somewhere.

--------------

% OF GNP DEVOTED TO EACH SECTOR OF THE U.S.
ECONOMY

Year

1950

1960

1970

1980

1985

1988

Manufacturing

29.4%

28.7%

25.8%

21.3%

19.7%

19.4%

Mining

3.2%

2.5%

1.7%

3.9%

2.8%

1.6%

Construction

4.5%

4.5%

4.8%

5.0%

4.6%

4.8%

Transportation

5.6%

4.5%

3.9%

3.9%

3.4%

3.3%

Agriculture, forestry,
fisheries

4.3%

3.2%

2.8%

2.3%

2.0%

7.3%

Miscellaneous services

8.5%

9.9%

11.7%

13.7%

16.1%

17.9%

Finance, insurance, real
estate

13.4%

14.1%

14.7%

15.9%

17.0%

10.8%

Communications

1.6%

2.1%

2.3%

2.4%

2.7%

2.6%

Utilities

1.9%

2.5%

2.3%

2.5%

3.2%

3.0%

Wholesale, retail trade

18.0%

16.7%

17.0%

16.1%

16.4%

16.0%

Government

8.3%

10.7%

13.2%

11.8%

11.9%

11.7%

Foreign

0.4%

0.5%

0.5%

1.7%

1.0%

0.7%

Sources: Historical Statistics of the United States,
Colonial Times to 1970, Series F 130-143; Statistical Abstract of
the United States, 1991, Table 699; both published by the U.S.
Department of Commerce.